Sterling Slips after Service Growth Slows
The Pound has weakened on the news that the UK’s Services sector, which accounts for about 80% of the UK economy, has slowed to the lowest level of growth since September 2016. The IHS Markit Services Purchasing Managers Index (PMI) unexpectedly fell from December’s figure of 54.2, dropping to 53.0. Companies reported a decrease in new work, due to “the loss of existing clients and lingering concerns surrounding the UK’s exit from the EU.” Markit’s chief business economist noted that the combined PMI data indicates the UK’s GDP growth rate this year is down to “just under 0.3%.”
In sharp contrast, the Eurozone Services PMI surpassed expectations, coming in at a robust reading of 58.0. Even stronger was January’s Composite PMI which rose to 58.8, which is the highest reading seen since 2006. The Euro is performing well and might be strengthened further by European Central Bank president Mario Draghi’s comments today. Global stock markets are highly volatile, following a sell-off of bonds on Wall Street last Friday.
Pound Sterling – UK Markets
The Pound is holding steady against the US Dollar, with the exchange rate at $1.41. Sterling slipped against the Euro, exchanging at €1.13.
Today’s IHS Markit Services Purchasing Managers Index shows a sharp decrease in the crucial services sector in the first month of the year. New order growth for January is weaker than the average 2017 growth, indicating the economy is contracting due to Brexit uncertainty. IHS Markit’s chief business economist, Chris Williamson describes this third PMI as part of a “triple whammy of weaker PMI surveys.” The slowdown in the services PMI comes on the heels of PMI data showing that UK manufacturing slowed and construction growth has slipped to nearly the stagnation level. This will decrease the chances of the Bank of England rising interest rates in the coming months.
Prime minister Theresa May has clarified a harder Brexit stance, by officially stating the UK will not remain in the customs union with EU. This paves the way for a bespoke agreement that allows Britain to negotiate trade deals with non-EU countries. David Davis meets with EU chief negotiator Michel Barnier to discuss on the Brexit transition arrangements, today. On Wednesday, the cabinet will decide the specific details of the government’s customs policy.
Brexit uncertainty is causing UK rents to rise at their slowest pace since 2013, according to a survey compiled by the Deposit Protection Service (DPS). Last year, average UK rent prices rose by 1.6%, which was also the first below-inflation increase since 2013. DPS commented, “The current slowdown in fact began in mid-2016 and is likely to be linked to the EU referendum result,” DPS managing director Julian Foster said. As the EU negotiations progress this year, Foster said it will “be interesting to watch the index.”
UK car sales continue to decline, falling by 6.3% in January, according to the Society of Motor Manufacturers and Trader (SMMT). In January 2017, new car sales were recorded at 174,564, that total was down to 163,615 this January. Diesel sales dropped by 25.6%, with a market share falling to 35.9%, while electric and hybrid sales rose to 23.9%, for a 5.5% market share.
US Dollar – US Markets
The US Dollar has slipped slightly against the Euro, exchanging €0.80. The US Dollar Index (DXY), which measures the strength of the Dollar against six major competitor currencies, is down, at 89.08.
Friday’s release of the US Non-Farm Payrolls boosted the US Dollar and caused the US stock market to fall 2.1% lower, on fears that Federal Reserve will raise rates by more than expected in the coming years. Non-Farm payrolls grew by 200,000 in January, surpassing expectation of an increase by 180,000. More importantly, wage growth was up to 0.3% for the month, reflecting the solid annual increase of 2.9%. This marked the best wage growth since the middle of 2009.
Today, president Trump’s new Federal Reserve governor, Jerome Powell is sworn into office. Unlike his predecessor, Janet Yellen, Powell is not an economist, although he has served as a member of the Federal Reserve Board of Governors since 2012. Powell will be the first Fed chair who is not an economist in nearly 40 years. He is expected to continue with Yellen’s cautious monetary policy of gradually raising interest rates, although with rising inflation, he would likely raise rates more aggressively than Yellen has.
The Institute of Supply Management (ISM) Non-Manufacturing Composite PMI is due out today and expected to rise from 56.0 up to 56.5. This highly significant indicator tracks economic data within 60 sectors across the US, and since the data is seasonally adjusted, it is an accurate indication of rising inflation. A strong reading might ripple across the US and global stock markets, which are already trading lower today.
Euro – European Markets
The Euro is stronger to most major currencies, including the US Dollar, with the exchange rate set at $1.24. The Euro rallied due to German Chancellor Angela Merkel engaging in the last round of talks to form a coalition government.
The Eurozone’s private sector has had its strongest monthly growth in over a decade, according to data in the IHS Markit Services Composite PMI. Germany’s growth to 59.0 marks an 81-month high and the same figure for Italy brings its growth to a 139-month high. Spain’s reading of 55.7 surpassed expectation and marked a 6-month growth high. France was unchanged, and Ireland slumped to a 2-month low.
Sentix Investor Confidence for February shows a surprising drop in investor sentiment to 31.9 when it had been expected to rise to 33.0 after January’s figure of 32.9. Sentix noted that the Eurozone’s recovery process is continuing, “although the first clouds are appearing in the blue economic sky.” There are market concerns that the decrease in investor confidence could “spill over into economic confidence.”
This afternoon, the Euro might get a boost from European Central Bank (ECB) president Mario Draghi’s speech. Testifying before the European Parliament in Strasbourg, France, Draghi will present the central bank’s annual report for 2017. Members of the European Parliament are expected to ask questions about the timing of the bank’s intention to taper down the stimulus programme and end quantitative easing.
Other Currencies – Highlights
Sterling has lost considerable value to the Australian Dollar, with the exchange rate lower at 1.77 AUD. January jobs advertised in newspapers and online spiked to their largest rise in a decade, according to today’s survey by banking group ANZ. The rate in January rose by 6.2% from December and the rate was up 13% compared to the previous year.
The Pound has fallen against the New Zealand Dollar, exchanging lower at 1.92 NZD. New Zealand Commodity Prices for January rose by 0.7%, reflecting the increase of milk prices caused by drier weather. ANZ’s commodity price index today also show that the price of whole milk powder, the country’s biggest export earner, rose by 5.1%.
The Pound is weaker against the Japanese Yen, with the exchange rate set at 155.07 ¥. Prime minister Shinzo Abe said today that he hopes the Bank of Japan “continues to promote bold monetary easing to achieve its 2% inflation target.” Although the economy is strengthening, Abe warned that Japan could still “slip back into deflation in the future.”